Battle of investment banks and boutiques heats up

When a company employs a boutique, they get access to high-profile bankers, such as Lazard’s John Wylie (pictured) and Tony O’Sullivan, Greenhill’s Ron Malek and Simon Mordant, and Gresham Partners’ David Feetham.
Photo: Nic Walker

by
Stephen Shore

Last year, one of the global investment banks planned a weekend in Macau for managing directors in its Asia Pacific offices, some 120 bankers. Two days of boozing and gambling with a loose leash on the expense account would be a great morale boost for the team after a patchy year for deals.

The Australian bankers, in particular, were looking forward to the chance to blow off some steam. They had worked harder than ever in 2012 but had struggled to convince clients to pull the trigger on transactions. As a result, bonuses had been withheld and many of the bankers that had left or retired during the year had not been replaced. But as the scheduled date for the weekend approached, details were oddly unforthcoming. Management had gone quiet.

The bankers soon realised the Macau trip had died a silent death. The harsh reality was that this investment bank – like many others last year – had failed to make a profit. A lavish weekend away, at a cost of up to $500,000, could not be justified. The austerity had become so extreme, the bankers joked, it was like working for a boutique adviser.

For many years, bankers at the large, international powerhouse investment banks, known as the “bulge brackets", have dismissed the upstart, partner-owned boutique advisory firms that compete against them for work on corporate deals, while the boutiques have won work by convincing their clients they are free of the conflicts of interest that plague the larger banks.

With the past 18 months having been one of the quietest periods for deal makers in recent memory, big banks have been pitching for smaller deals that would ordinarily be left to the boutiques, while boutiques are pushing the independence line even harder while trying to step up to work on larger transactions.

And with few signs that markets are improving, it seems the fierce competition is likely to intensify as the rivalry between boutiques and bulge brackets is reignited.

Rise of the boutiques

Boutiques are typically led by exceptional bankers with a couple of decades of experience at a bulge bracket bank and an extraordinary network of contacts that enables them to strike out on their own. The big banks have long been sceptical of their ability to do so but the rise of Caliburn Partnership (acquired by Greenhill in 2010) and Carnegie, Wylie & Co (acquired by Lazard in 2007) during the noughties proved that many clients were willing to embrace the model. Last year, when Lazard acquired another boutique, O’Sullivan Partners, there was speculation it was struggling to meet the high rent for its offices in Deutsche Bank Place. But the combination has become a dominant force in the market since, with Lazard topping the M&A league table as of mid-August, putting it ahead of Goldman Sachs and Macquarie.

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When a company employs a boutique, they get access to high-profile bankers, such as Greenhill’s Ron Malek and Simon Mordant, Lazard’s John Wylie and Tony O’Sullivan, Gresham Partners’ David Feetham, Flagstaff Partners’ Tony Burgess or Rothschild’s Bruce MacDiarmid.

By contrast, the rainmakers at the bulge brackets – a Matthew Grounds or Guy Fowler at UBS, Robin Bishop at Macquarie or Christian Johnson at Goldman Sachs – are only wheeled out for the crème of corporate Australia. This is a function of the big banks having a larger number of clients competing for attention and a fatter pool of mid-level bankers needing a stream of work to occupy their teams.

“When you’re making acquisitions in Australia, or looking to make connections in the Australian business community, you’re probably going to be better served by the well-established boutique firms, because they tend to be headed by people who have been there, done that, built extensive networks of contacts, and actively flex those when they are working for you."

The same dynamic also creates one of the key risks to boutique longevity; many have built their success on the cult of a few personalities, leaving them open to key man risk.

“You got some amazing rainmakers at these boutique firms," one banker says. “Once they go, many of them will struggle."

The current market environment – the first half of 2013 was the quietest six months for equity capital markets bankers in a decade – is also making it harder for boutiques to eke out the fees they once did, as investment banks are more willing to work on the smaller deals that boutiques used to target largely free from competition.

Sharing gigs

Major investment banks have had a general rule of thumb that if a deal generates less than $3 million in fees, it’s not worth dedicating resources to. The typical advisory fee on a M&A deal is about 1 per cent, so major banks would generally steer clear of transactions below $300 million. But in this market, that equation has been tossed out the window.

Banks eager for league table credit (and for something to occupy the team) are pitching for smaller deals. Boutiques are also having to share gigs with their larger rivals; when a deal comes along, companies wary of upsetting bankers are appointing multiple advisers.

“There is no safe area for a boutique to carve out a niche," one banker says.

“You can see that in the size of deals and fees big banks are willing to work for."

Yet the trend towards multiple advisers, especially on large transactions, can work in favour of the boutiques, as their low overheads mean they only need to complete a few deals to be profitable.

In contrast, big banks have to cover large salaries of their large teams of deal makers and there is a huge apparatus of IT staff, human resources, accounts and other non-revenue producing staff to support.

Unable to compete on costs, the big banks are hitting back by tackling the idea of an “independent" boutique head-on. Many consider it a marketing gimmick. It is impossible to build a successful advisory business within a bulge bracket bank without independent advice, they say, and to suggest otherwise is an insult to their client’s sophistication. The bulge brackets point out that for most boutiques, the sole source of revenue is fees from advisory work, so when markets are quiet, the partners at a boutique have a stronger financial incentive to recommend a deal that’s not in the client’s interest.

If an integrated bank misses out on a deal, a client can reward them in other ways, by awarding a hedging contract, for example.

Big banks have other businesses that can subsidise the investment banking division when times are tough. They also have an army of sector and market analysts at their disposal and can draw on a wider network of expertise. Boutiques counter that their sole motivation is to provide good advice. They do not have to hit arbitrary targets to satisfy the shareholders of an offshore parent (though this is no longer true of Caliburn after its acquisition by Greenhill) or worry about a strategic desire to be in the top three of the league tables.

Gresham’s co-head of advisory and managing director Bruce McLennan says boutiques are more likely to get repeat business.

“We’re not as transaction-focused as the integrated investment banks but rather focus on trusted, long-term relationships," he says.

But this points to a challenge for boutiques; their advice is their point of differentiation. Most deals do not require a reinvention of the wheel.

“A lot of the advice we need is complex but it’s generic: ‘We’d like to sell this asset’," one CFO says.

“For major corporates, unless it’s a specialist thing they are looking for and this boutique can provide niche advice, it’s hard for them to get through the door because CFOs have a portfolio relationship with these major banks."

Bank relationships

Another challenge for boutiques is the largest companies borrow large amounts of money from the bulge bracket banks. As deal flow dries up, big banks are putting more pressure on companies to reward their capital investment with advisory work.

Barclays co-head of investment banking in Australia Tim Lindley says since the financial crisis, corporate Australia is looking for a deeper ongoing relationship with their bank. “That means providing day-to-day activities, such as foreign exchange, derivatives, balance sheet lending and support across their normal function, through to higher value transactions, whether it be advisory, equity, or large debt capital raisings."

The CFO of a top 100 company that regularly borrows large amounts of cash agrees it is important to have a “symbiotic" partnership with the lenders.

“We don’t do much with the boutiques," he says. “We’re not going to use an adviser that has no balance sheet with us, unless we are after very specific advice or there’s a situation where we believe a balance sheet bank might be conflicted."

Credit advice is one area where the power of boutiques is being recognised.

This CFO says credit advice “would be one instance" when a boutique could be valuable.

“You don’t necessarily want to do that with a bank that lends you money, even if they have a Chinese wall in place," he says.

Grant Samuel and Rothschild have carved themselves a niche in this space, as independent advisers for financing.

Grant Samuel managing director Guy Fergusson says other boutiques tend to be specialists in M&A strategy rather than financing a deal, while the major banks’ advice inevitably leans towards the speciality of their internal team.

But asking a lending bank for credit advice is like “putting the fox in the hen house", he says. “Since the crisis, the attitude has changed. Boards have seen the true colour of the big banks and the inherently conflicted nature of their advice. That’s what we’re seeing on the street and what has underpinned the growth in our business. over the past five years."

Fergusson says
Whitehaven Coal
’s $1.2 billion financing deal with the
ANZ Banking Group
in November last year was a prime example of the power of the independent debt adviser; Grant Samuel sourced funding options in the US Term Loan B market and forced the Australian banks to offer better terms.

As those denied their junket to Macau may attest to, the flexibility of boutiques means the average banker might be better off in one of them at this point of the cycle, says Mark Johnson, former Macquarie deputy chairman and now senior adviser at Gresham.

“In an integrated firm there is real pressure to keep the bonuses up for the high producers, so often there are rather deep retrenchments. In a boutique, there’s an ability to reduce everyone’s expectations in line with market conditions."